2019 (6) TMI 1718 - AT - Income Tax

Estimation of income - bogus purchases - purchase from the grey market - quantification of the profit element embedded in making of such bogus/unsubstantiated purchases - HELD THAT - As decided in M. Haji Adam Co. 2019 (2) TMI 1632 - BOMBAY HIGH COURT the addition in respect of bogus purchases is to be limited to the extent of bringing the gross profit rate on such purchases at the same rate as of other genuine purchases Thus we set aside the matter to the file of the assessing officer with the direction to restrict the addition as regards the bogus purchases by bringing the gross profit rate on such bogus purchases at the same rate as that of the other genuine purchases - Appeals by the assessee allowed for statistical purposes.

Summary

Issues:
1. Disallowance on account of bogus purchases for concerned assessment years.
2. Addition on account of bogus purchases made by the assessee.
3. Determination of the gross profit rate on bogus purchases.

Analysis:
1. The case involves appeals by the assessee challenging the disallowance of 4.08% and 3.77% on account of bogus purchases for different assessment years. The assessment was reopened based on information from the Sales Tax Department regarding alleged bogus purchases. The Income Tax Officer made a 5% addition on account of these purchases, which was reduced to 8% by the CIT(A). The ITAT considered the documentary evidence provided by the assessee and noted that while suppliers were not produced, sales were not doubted. The tribunal referred to a High Court decision supporting the allowance of purchases when sales are not doubted, especially in cases where all supplies were to government agencies.

2. In another issue, the Tribunal dealt with the assessment year concerning a trader of fabrics. The AO concluded purchases were bogus based on survey operations and added the entire amount to the assessee's income. The CIT(A) accepted the purchases were bogus but restricted the addition to 10% of the purchase amount. The Tribunal partially allowed the assessee's appeal and dismissed the Revenue's appeal. The Tribunal held that the purchases cannot be rejected without affecting sales and restricted the additions to align with the gross profit rate on genuine purchases. The Tribunal's decision was supported by the facts that sales were not disputed, and there was no discrepancy between purchases and sales declared.

3. The Tribunal referred to a Gujarat High Court decision but distinguished it based on the specific facts of the case. The High Court's decision emphasized the need to align the gross profit rate on bogus purchases with genuine purchases. Following the High Court's judgment, the Tribunal set aside the matter to the assessing officer with directions to restrict the addition by aligning the gross profit rate on bogus purchases with genuine ones. The assessee was to be given an opportunity to be heard. Ultimately, the appeals by the assessee were allowed for statistical purposes, in line with the High Court's decision.

In conclusion, the judgment addressed issues related to disallowance on account of bogus purchases, the addition of such purchases to the assessee's income, and the determination of the gross profit rate on these purchases. The decisions were based on legal principles, precedents, and the specific facts of the cases, ensuring fairness and adherence to tax laws.